3 reasons why I buy Netflix stocks
When it comes to identifying stocks for a potential investment, I mainly focus on qualitative factors. Before I even look at the valuation, the company must be meaningful to me, and it must have an advantage over its peers.
To me, Netflix (NASDAQ: NFLX) corresponds to the criteria of a quality company. And the market thinks so too, because the Stock is up 64% this year at Tuesday prices.
I firmly believe that historic winners can continue to be successful longer than they think. Netflix is no different. Here are three reasons why I will soon be buying shares of the streaming pioneer.
It is the leader in streaming
With nearly 200 million paying subscribers in more than 190 countries, Netflix is the clear leader in streaming entertainment. Co-founder and CEO Reed Hastings was ahead of his time in recognizing the disruptive power of the internet on media consumption, which is why his company introduced streaming video on demand in 2007 – even as it disrupted the video rental industry with its DVD mail service.
As a pioneer, Netflix has spent huge sums of money on content in an effort to gain subscribers as quickly as possible. It was definitely the right strategic decision from the start, as the company didn’t face any competition when it came to streaming. Now Netflix is able to spend more than its peers while spreading the costs over a much larger subscriber base.
From 2017 to 2019, Netflix spent just under $ 37 billion on the content. On this scale, no other pure-play streaming company can match it. Those who are old enough have other professions besides their streaming services, notably Amazon First, Apple TV +, and Disney +.
Another factor supporting Netflix’s dominance is its ability to attract the best and brightest talent in the entertainment industry. Hastings runs its business as a sports team, where the best are rewarded and mediocre employees are fired. While this might not be the right work environment for everyone, it has worked for Netflix so far.
Shows have a cultural influence
Spending tens of billions on content would mean nothing if viewers didn’t like the shows and movies produced. But this year has provided many examples of the popularity of Netflix originals.
A recent case is The Queen’s Gambit, which was released in late October. The scripted limited series has been watched by 62 million households within 28 days of discharge, a registration for Netflix. What is more impressive is the growing interest in chess thanks to the spectacle. Google research for “How to Play Chess” hit an unprecedented high in November since 2011. The eponymous book the show is based on has caught on. The New York Times better-sellers list, 37 years after its first publication!
We also saw this kind of public frenzy earlier in the year. As lockdowns were implemented in March to stop the spread of the novel coronavirus, Netflix released King tiger with great fanfare. This documentary series was talked about on all social networks and inspired many Halloween costumes.
Netflix has made it clear that creating popular content is a core skill, and subscribers have come to see the streaming service as a place to find captivating entertainment. This will help maintain their lead as the competition intensifies.
Valuation doesn’t bother me
As the economy continues to shift from an economy based on tangible assets to one increasingly based on intangible assets, the price-to-earnings (P / E) ratio fails to properly capture the essence of these digital businesses of the new era.
In the case of Netflix, it can be safely assumed that a large portion of its marketing, technology, and development spending in one time period actually benefits the business in future periods. Instead of being capitalized and expensed over time, these costs show up in full in the income statement, underestimating the actual profit of the business.
This would mean that the true P / E ratio for Netflix is really lower than the reported 86, which makes it more attractive from a valuation point of view. Combine that with its first-come advantage, ability to spend more on content than its peers and top-tier workforce, and you’ve got stock worth adding to your portfolio. In a few days, as soon as Motley Fool’s trading rules allow, I’ll add it to mine.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.